This
report has cleared the Treasury Inspector General for Tax Administration
disclosure review process and information determined to be restricted from
public release has been redacted from this document.

This report presents the results of our review of the
Internal Revenue Service’s (IRS) compliance with Freedom of Information Act (FOIA)[1]
requirements.The overall objective of
this review was to determine whether the IRS improperly withheld information
requested by taxpayers in writing, based on FOIA exemption (b)(3), in
conjunction with Internal Revenue Code Section (I.R.C. §) 6103,[2]
and/or FOIA exemption (b)(7), or by replying the requested records were not
available.Under IRS Restructuring and
Reform Act of 1998 § 1102 (d)(3)(A),[3]
the Treasury Inspector General for Tax Administration is required to conduct
periodic audits of a statistically valid sample of the total number of
determinations made by the IRS to deny written requests to disclose information
to taxpayers on the basis of I.R.C. § 6103 or FOIA exemption (b)(7).We also are required to include the results
of this audit in one of our Semiannual Reports to Congress.

Synopsis

The FOIA, the Privacy Act of 1974,[4]
and I.R.C. § 6103 govern the release of Federal Government records to the
public.The FOIA requires that records
be made available to the public upon request unless specifically exempt.The Privacy Act contains a provision that
prevents Federal Government agencies from relying on any exemption in the
Privacy Act to withhold records that are otherwise available to an individual
under the FOIA.I.R.C. § 6103 protects
the confidentiality of taxpayers’ returns and return information, while
providing a means for taxpayers to request their specific documents and
information or request that it be disclosed to their designees.

In 6.1 percent (5 of 82 cases) of the FOIA and Privacy Act
cases we sampled, the IRS did not provide complete responses and improperly
withheld information from requestors.This represents a lower percentage of improper withholdings than
reported in our Fiscal Year 2005 audit report[5]
(7.1 percent).In addition, in 2.3
percent (2 of 87 cases) of the I.R.C. § 6103 cases we sampled, the IRS
improperly withheld information from requestors.This represents a slightly lower percentage
of I.R.C. § 6103 cases than the 3.1 percent of improper withholdings we reported
last year.

The percentage of untimely responses to FOIA and Privacy Act
requests also decreased to 7.3 percent (6 of 82 cases) in this year’s
sample, as compared with the untimely rates in our previous audit reports.In our previous 6 years’ audits, the
percentages of untimely responses ranged from 13.1 percent to 43.5 percent.

Response

We made no specific recommendations during this audit since
recommendations made in previous Treasury Inspector General for Tax Administration
audit reports are still valid for the issues reported.However, IRS management reviewed a discussion
draft of this report and agreed with the facts, findings, and outcome measures
presented.

Copies of this report are also being sent to the IRS
managers affected by the report findings.Please contact me at (202) 622-6510 if you have questions or Nancy A.
Nakamura, Acting Assistant Inspector General for Audit (Headquarters Operations
and Exempt Organizations Programs), at (202) 622-8500.

The Internal Revenue Service (IRS) Restructuring and Reform
Act of 1998[6]
requires the Treasury Inspector General for Tax Administration (TIGTA) to:

. . . conduct periodic
audits of a statistically valid sample of the total number of determinations made
by the Internal Revenue Service to deny written requests to disclose
information to taxpayers on the basis of section 6103[7] of this title[8] or section 552(b)(7) of title 5, United
States Code [U.S.C.].[9]

The three primary laws that govern the types of requests for
information reviewed in this audit are:

The FOIA
requires agencies to make records of the Federal Government available to the
public upon request unless specifically exempt.

The Freedom of
Information Act (FOIA) requires Federal Government agencies to make records
available to the public upon request unless specifically exempted.Information that is “specifically exempted
from disclosure by statute” is one of the exemptions.Internal Revenue Code Section (I.R.C. §)
6103 is an example of such a statute; it protects the confidentiality of tax returns
and return information.Records and/or
information compiled for law enforcement purposes are also exempt from
disclosure under the FOIA.

The Privacy Act of
1974[10]
prohibits Federal Government agencies from relying on any exemption in the
Privacy Act to withhold records that are otherwise available to an individual
under the FOIA.

I.R.C. § 6103, while
protecting the confidentiality of taxpayers’ returns and return information,
does allow a taxpayer, or a person designated by the taxpayer, to request and
receive the taxpayer’s specific documents and information.

IRS processing and reporting of FOIA cases

Within the IRS, the Small Business/Self-Employed Division Office
of Communications, Liaison, and Disclosure (through its Governmental Liaison
and Disclosure function) is responsible for ensuring timely compliance with the
FOIA, the Privacy Act, and I.R.C. § 6103.The Office of Disclosure within the Governmental Liaison and Disclosure function
sets policy and issues instructions, guidelines, and procedures to ensure
compliance with the disclosure statutes.

The Disclosure offices within the Small Business/Self-Employed
Division processed almost all the FOIA and Privacy Act requests received by the
IRS through January 2006.Beginning in
February 2006, responsibility for processing the requests for tax compliance
checks and transcripts was transferred from the Small Business/Self-Employed
Division Disclosure offices to the Wage and Investment Division Return and
Income Verification Services Unit.

In its FOIA Annual Report for Fiscal Year (FY) 2005, the IRS
reported that, of the 42,533 FOIA cases it processed, the IRS denied or
partially denied information to requestors in 3,065 cases (7.2 percent).The IRS also reported it advised requestors
that there were no records responsive to requests in 11,795 cases (27.7
percent).The remaining cases were either
granted in full or closed for miscellaneous reasons, such as improper requests
or requests that had been granted previously.

Audit limitations and standards

Written requests for information made under I.R.C. § 6103 were
processed by either individual IRS Disclosure offices or other IRS offices
having custody of the records requested. While the IRS is not required to track requests
made under I.R.C. § 6103, the IRS has elected to do so for requests received by
IRS Disclosure offices, which use the Electronic-Disclosure Information
Management System (E-DIMS) to track requests made under both the FOIA and the Privacy
Act.Requests made under I.R.C. § 6103
that were received and processed by IRS offices other than Disclosure offices are
neither controlled on the E-DIMS nor otherwise inventoried. Consequently, the volume of these requests is not
known. As a result, we can statistically sample only the I.R.C. §
6103 requests processed directly by the IRS Disclosure offices and tracked
by the IRS on the E-DIMS. We reviewed
requests that were denied during the 6-month period from April 1, 2005, through
September 30, 2005.

During the 6-month period, IRS Disclosure offices processed 19,000
requests made under either the FOIA or the Privacy Act.The IRS denied or partially denied 1,339 of
these requests (7.1 percent) based on FOIA exemptions (b)(7) or (b)(3) in
conjunction with I.R.C. § 6103.The IRS
response to 5,070 of the 19,000 requests (26.7 percent) made under the FOIA or the
Privacy Act was that records were not available.We selected our sample cases from a total
population of 6,409 cases, which included both the 1,339 denied or partially
denied cases and the 5,070 responses that no records were available.

During this same 6-month period, IRS Disclosure offices
processed 15,948 requests made under I.R.C. § 6103.We estimated the Disclosure offices denied
information, or told requestors that records were not available, for
approximately 30 percent of these requests (4,719 requests).[11]The remaining requests were granted in full,
or information on the disposition was not available.

This review was performed at the Governmental Liaison and
Disclosure function in Washington, D.C., during the period January 2006 through
July 2006.The audit was conducted in
accordance with Government Auditing
Standards. Detailed information on our audit
objective, scope, and methodology is presented in Appendix I.Major contributors to the report are listed
in Appendix II.

The IRS has continued to improve its service to FOIA, Privacy
Act, and I.R.C. § 6103 requestors. The
percentages of improper withholdings decreased during the period from which our
sample cases were drawn (April 1, 2005, through September 30, 2005) when
compared with the previous audit period.Figure 1 shows the percentage of improper withholdings for FOIA/Privacy
Act and I.R.C. § 6103 requests identified in this audit and the six prior
audits we have conducted.

Figure 1 was removed due to its
size.To see Figure 1, please go to the
Adobe PDF version of the report on the TIGTA Public Web Page.

For this audit, in 5 (6.1 percent) of the 82 FOIA and Privacy
Act cases sampled and 2 (2.3 percent) of the 87 I.R.C. § 6103 cases
sampled, the IRS did not provide complete responses and improperly withheld
requested information.When projected to
the population of 6,409 FOIA and Privacy Act cases and 4,719 I.R.C. § 6103
cases closed by the Disclosure offices during our sample period, we estimate
there were 391 FOIA and Privacy Act cases and 109 I.R.C. § 6103 cases for which
the Disclosure offices did not provide available tax records to the requestors.[12]

As a result, there is potential that taxpayers’ rights were
violated, additional burden could be placed on taxpayers, and the IRS could
incur additional costs.For FOIA
requests, if the IRS reports that no responsive records exist or denies any
part of the request, the requestor may appeal the IRS decision administratively.If the IRS denies the administrative appeal,
the requestor has the right to appeal the denial in court.Preparing and processing the appeals would
place additional burden on the requestor and additional costs to the IRS.During FY 2005, the IRS processed 324
appeals; 283 (87.3 percent) cases were completely upheld, 23 (7.1 percent) of
the denials were partially reversed, 9 (2.8 percent) were completely reversed,
and 9 (2.8 percent) were closed for other reasons.The requestors did not appeal the IRS’ determination
in the five cases from our sample for which the IRS did not provide complete
responses and improperly withheld requested information.

There are no appeal provisions for requests that are
partially or fully denied or for which no records were responsive to the
requests for I.R.C. § 6103 cases.Requestors
could incur additional burden if they decided to request the information again,
and the IRS would incur additional costs to process the requests.

We analyzed the five FOIA and Privacy Act cases and the two
I.R.C. § 6103 cases with improper withholdings and determined the types of
information improperly withheld have remained relatively constant over all
seven audit periods. The most common
types of information withheld were miscellaneous IRS forms and documents
associated with tax transcript information.

Errors occurred mainly because of inadequate research or
simple oversight by the Disclosure caseworkers. For example, for two of the FOIA cases, the Disclosure caseworkers either did not conduct
complete research or did not follow up with the Files function when requested
information was not received.In the other
cases, the Disclosure caseworkers either addressed only one part of a two-part
request or stated information was not available when it was readily available.

In response to prior TIGTA reports,[13] the IRS initiated actions to
improve the quality of responses.Recommendations
made in previous audit reports are still valid for the quality issues contained
in this report.As a result, we are
making no additional recommendations.

The FOIA requires Federal Government agencies to respond
within 20 business days[14]
of the receipt of a request or to notify the requestor of the reason why the
request cannot or will not be filled. Federal Government agencies are required to
notify the requestor immediately if they are unable to respond to the request
within the time limit, stating the reasons why they are unable to respond and advising
the requestor of his or her right to appeal. The due date for a FOIA request is revised
when the IRS sends a letter to the requestor exercising its right for an
automatic extension of 10 business days and/or requesting a voluntary extension
in excess of the initial statutory 20 business day period for FOIA requests.[15]The requestor must agree to the
voluntary extension, and the IRS must notify the requestor of its ability to respond
by the end of the extension period. A
case is untimely when the IRS responds to the requestor after the due
date.For Privacy Act cases, the IRS
must respond within 30 business days of the taxpayer’s request.

Since FY 2000, the IRS has made some significant improvements
in the timeliness of responses to FOIA and Privacy Act requests.For 6 (7.3 percent) of the 82 FOIA and Privacy
Act cases, the Disclosure offices did not respond to the requestors in the time
required by law. In these instances,
taxpayers did not receive the level of service envisioned under the statute. We estimate from the population of 6,409 cases
closed during the period April 1, 2005, through September 30, 2005, with a
disposition code of denied, partially denied, or no responsive record, there
were 469 FOIA and Privacy Act requests not processed timely. This represents a further decrease in the
number of untimely cases compared with prior TIGTA audits.Figure 2 shows the percentages of untimely
cases we have reported since FY 2000.

Figure 2 was removed due to its size.To see Figure 2, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.

We were unable to determine the
reasons why the six FOIA and Privacy Act cases were untimely based on the
information in the case files.In ****1**** of the six cases, extension
letters were sent to the requestors and due dates were appropriately revised,
but the IRS responded to the requestor after the revised due dates.In ****1**** of the six cases, the IRS simply
missed the original due dates and issued no extension letters. ****1****The untimely cases ranged from 1 to 28
business days past due.

In response to a prior TIGTA
report,[17] the IRS initiated
actions to improve the timeliness of responses.Recommendations made in previous TIGTA audit reports are still valid for
the timeliness issue contained in this report.As a result, we are making no additional recommendations.

The overall objective of this review was to determine
whether the IRS improperly withheld information requested by taxpayers in
writing, based on FOIA[18]
exemption (b)(3), in conjunction with I.R.C. § 6103,[19]
and/or FOIA exemption (b)(7), or by replying the requested records were not
available.Specifically, we:

I.Determined if the IRS Disclosure offices adhered to
statutory FOIA and Privacy Act of 1974[20]
requirements and procedural requirements.

A.Obtained a national extract from the E-DIMS for
the period April 1, 2005, through September 30, 2005, and identified 6,409 FOIA
and Privacy Act cases closed as denied or partially denied based on FOIA exemption (b)(3), in conjunction with I.R.C. §
6103, and/or FOIA exemption (b)(7), or where the IRS replied responsive records
did not exist.We performed specialized
queries of the national extract data and determined that the data were reliable.

B.Designed an attribute
sample based on a 90 percent confidence level, an expected error rate of 8.18
percent, and an estimated precision of +5 percent.This sampling methodology was chosen so we
could project the number of cases with improper withholdings to the universe of
cases that were partially or fully denied based on FOIA exemption (b)(3), in conjunction
with I.R.C. § 6103, and/or FOIA exemption (b)(7), or where
requestors were told records were not available.The sampling plan and methodology are the
same as those used in prior audits.

C.Reviewed a random
sample of 82 cases selected in Step I.B. and determined if the decision to
withhold information was appropriate, the record search was adequate, and the
determination was made timely.

D.Based on results from Step I.C., projected the number of
improper withholdings in the range of 114 to 668 (1.8 percent to 10.4
percent) FOIA and Privacy Act cases.The
projection was made using attribute sampling, with a 90 percent confidence
level and an actual error rate of 6.1 percent.As a result, the actual precision factor was +4.32 percent.

E.Based on results from Step I.C., projected the
number of untimely determinations in the range of 168 to 770 (2.6 percent
to 12.0 percent) FOIA and Privacy Act cases.The projection was made using attribute sampling, with a 90 percent
confidence level and an actual error rate of 7.3 percent.As a result, the actual precision factor was +4.70 percent.

II.Determined if the IRS
Disclosure offices adhered to legal requirements when denying written requests
received from taxpayers under I.R.C. § 6103.

B.Designed an attribute sample based on a 90
percent confidence level, an expected error rate of 8.74 percent, and an
estimated precision of +5 percent.This sampling methodology was chosen because it would allow us to
project the number of cases with improper withholdings to the universe of
closed I.R.C. §§ 6103 (c) and (e) requests where information was partially or
fully denied or where the IRS replied that responsive records did not exist.

C.Initially selected a random sample of 300 of the
15,948 I.R.C. §§ 6103 (c) and (e) closed cases.We reviewed the first 294 cases sampled to obtain the required number of
cases to statistically project our results.

1.Determined 87 (29.6 percent) of the 294 reviewed
cases included instances where information was partially or fully denied or
where the IRS replied that responsive records did not exist.

2.Based on an initial
analysis of the 294 cases, estimated the population of 15,948 closed I.R.C. §§
6103 (c) and (e) requests contained 4,719 where information was partially or
fully denied or where the IRS replied responsive records did not exist.

D.Reviewed the 87 cases where information was
partially or fully denied, or where the IRS replied that responsive records did
not exist, and determined if the decision to withhold the information based on
I.R.C. § 6103 was appropriate.

E.Based on results from Step II.D., projected the number of
improper withholdings in the range of 2 to 233 (.04 percent to 4.94 percent)
for the I.R.C. §§ 6103 (c) and (e) requests.The projection was made using attribute
sampling, with a 90 percent confidence level and an actual error rate of 2.3
percent.As a result, the actual
precision factor was +2.64 percent.

This appendix presents detailed information on the
measurable impact that the recommended corrective actions made in prior TIGTA
reports will have on tax administration.These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

Taxpayer
Rights – Potential; 391 responses to FOIA[21]
or Privacy Act of 1974[22]
requests where information was improperly withheld during the 6-month
period April 1, 2005, through September 30, 2005 (see page 4).

Methodology Used to Measure the Reported Benefit:

The attribute sample was randomly selected from the universe
of FOIA and Privacy Act requests that were closed nationally during the period
April 1, 2005, through September 30, 2005, as

1) a full or partial denial with either FOIA exemption
(b)(3), in conjunction with I.R.C. § 6103,[23]
and/or FOIA exemption (b)(7) cited as one of the reasons for withholding
information or 2) where the IRS replied responsive records did not exist.We arrived at the estimate by:

·Multiplying the number of requests closed as
partially or fully denied based on FOIA exemption (b)(3), in conjunction with
I.R.C. § 6103, and/or FOIA exemption (b)(7) or where the IRS replied responsive
records did not exist by the error rate of cases reviewed.In 5 (6.1 percent)
of the 82 cases reviewed, the IRS did not provide complete responses and
improperly withheld information from requestors.A case was considered an “error” if a
Disclosure office improperly withheld information that was available and could
have been released under the FOIA and the Privacy Act.

6,409 * 6.1 percent = 391 cases.

Type and Value of Outcome Measure:

Taxpayer
Rights – Potential; 109 responses to I.R.C. § 6103 requests where
information was improperly withheld during the 6-month period April 1,
2005, through September 30, 2005 (see page 4).

Methodology Used to Measure the Reported Benefit:

The attribute sample was randomly selected from the
universe of I.R.C. §§ 6103 (c) and (e) requests that were closed nationally
during the 6-month period April 1, 2005, through September 30, 2005.The Disclosure offices are not required to
input a disposition code showing how I.R.C. § 6103 cases are closed (granted,
denied, etc.).We arrived at the estimate
by:

·Identifying 15,948 closed I.R.C. §§ 6103 (c) and
(e) requests.

·Randomly selecting for review 294 of these cases
to estimate the universe of denied, partially denied, or no requested record
available cases closed during the period April 1, 2005, through
September 30, 2005.

·Multiplying the total number of closed requests
in the audit universe by the percentage of cases in the sample where
information was partially or fully denied or where the IRS replied that
responsive records did not exist (87 of 294 or 29.6 percent).

·Multiplying the estimated universe of cases
where information was partially or fully denied, or where the IRS replied that
responsive records did not exist, by the error rate for the cases reviewed.In 2 (2.3 percent)
of the 87 cases reviewed, the IRS did not provide complete responses and
improperly withheld information from requestors.A case was considered an “error” if
the Disclosure office improperly withheld information from the requestor.

·4,719 * 2.3 percent = 109 cases.

Type and Value of Outcome Measure:

·Taxpayer Rights – Potential; 469 FOIA and Privacy
Act requests that were not processed timely during the 6-month period April 1,
2005, through September 30, 2005 (see page 6).

Methodology Used to Measure the Reported Benefit:

The attribute sample was randomly selected from the
universe of FOIA and Privacy Act requests that were closed nationally during
the 6-month period April 1, 2005, through September 30, 2005, as 1) a full or
partial denial with either FOIA exemption (b)(3), in conjunction with I.R.C. §
6103, and/or FOIA exemption (b)(7) cited as one of the reasons for withholding
information or 2) where the IRS replied responsive records did not exist.We arrived at the estimate by:

·Multiplying the number of requests closed as
partially or fully denied based on FOIA exemption (b)(3), in conjunction with
I.R.C. § 6103, and/or FOIA exemption (b)(7), or where the IRS replied
responsive records did not exist by the percentage of untimely responses.In 6 (7.3 percent)
of the 82 cases reviewed, the IRS was not timely in providing responses to
requestors.

[11] We
estimated this number based on the ratio of cases in our sample in which
requestors were denied information or were told records were not available (see
Appendix I).

[12] See
Appendix I for an explanation of our sampling methodology and Appendix IV for a
description of the outcome measures.

[13]Some Improvements Have Been Made to Better
Comply With Freedom of Information Act Requirements (Reference Number
2005-10-089, dated May 2005); Improvements
Are Needed to Ensure Compliance With the Freedom of Information Act (Reference
Number 2004-40-064, dated March 2004); Actions
Should Continue to Be Taken to Improve Compliance With the Freedom of
Information Act and Related Procedures (Reference Number 2002-10-093, dated
May 2002).

[14] Business
days exclude Saturdays, Sundays, and legal public holidays.

[15] The
10-day extension is “automatic” in that it is solely at the discretion of the
Disclosure officer; the voluntary extension requires notification to the
requestor who may then respond and file an appeal.Either or both extensions may be used in a
given case.

[16]
We did not evaluate the timeliness of responses to FOIA and Privacy Act
requests in the FY 2004 audit because the IRS was in the process of
implementing TIGTA recommendations to improve timeliness.

[17]Actions Should Continue to Be Taken to
Improve Compliance With the Freedom of Information Act and Related Procedures (Reference
Number 2002-10-093, dated May 2002).